Lawsuits tied to the Truth in Lending Act are on the decline but bankers would be wise to delay any celebration.
Court decisions tied to the 1968 law fell 18% year over year during a 12-month period that ended May 31, to 1,037, data from the National Consumer Law Center shows. That number is down 38% from the peak two years earlier.
The pace of new litigation is also slowing. In May, plaintiffs filed 16 lawsuits in federal courts over alleged Truth in Lending violations, according to TRAC Records, a research arm of Syracuse University. That was less than half the lawsuits filed a year earlier and much lower than the 152 civil actions filed in May 2009.
Improved business practices at banks may be contributing to the drop-off, industry observers say. But there are fears litigation could spike, given new regulations and a heavier focus on consumer protection.
Bankers remain "concerned about the magnitude of changes that are happening," says Wayne Barnes, president of Professional Bank Services. "Particularly for community institutions, it's a huge burden and they have justifiable concerns."
The Truth in Lending Act was designed to protect consumers by requiring lenders to make proper disclosure of loan information such as the annual percentage rate, total cost and other key terms.
A decline in litigation is also a reflection of the economy, industry observers say. Struggling borrowers sometimes use Truth in Lending lawsuits to stave off foreclosures, which increased after the housing bubble burst.
"I don't think the drop has anything to do with better disclosures by lenders," says Carolyn Carter, deputy director for advocacy at the National Consumer Law Center. "The fact that Truth in Lending claims started surging during the foreclosure crisis suggests those are related."
Banks have historically defended themselves well against Truth in Lending claims, perhaps leading borrowers' lawyers to pursue other legal channels. A bank can usually "show a copy of the Truth in Lending statement that the borrower signed, and it is there in black and white," says David Dunn, a lawyer at Hogan Lovells.
Other factors could also be at work. Federal Truth in Lending lawsuits are being filed at an even slower rate than before the housing crisis.
It can take years before a mortgage origination sours, and even longer before those issues cause a beleaguered borrower to pursue litigation, industry observers say. And sales of new homes have been tepid in recent years.
Lenders have also made adjustments to their forms in recent years, reflecting concerns about compliance and litigation, says Stanley Orszula, a lawyer in the corporate services practice group at Quarles & Brady. Banks have also benefited from improved risk management and employee training, Barnes says.
"By and large, lenders get it right," Dunn says. "Truth in Lending litigation hasn't gotten a lot of traction, absent a real screwup. This is not something banks get wrong anymore."
Technology has played an important role as well, Barnes says. With most banks using software that makes it easier to prepare disclosures, there's a smaller likelihood something will be overlooked, says Rusty Cloutier, president and chief executive of MidSouth Bancorp in Lafayette, La.
Despite these gains, industry experts expect more Truth in Lending litigation once new regulations are implemented. A combined Truth in Lending and Real Estate Settlement Procedures Act form is just one change banks will have to grapple with, Barnes says. The emergence of the Consumer Financial Protection Bureau adds additional uncertainty.
These changes will "cause growing pains for banks," Orszula says, so banks should start reviewing manuals, procedures and training programs. Industry experts say they expect a lag between the new regulations and another rise in lawsuits.
Many future lawsuits likely will involve lawyers looking to exploit bankers' lack of familiarity with new regulation. Those lawyers could focus on technical violations, filing lawsuits with the intention of earning a quick payday, Orszula says. "Sometimes the pendulum swings in the other direction, so some of these laws and regulations are well meaning but aren't well thought out," he says.
MidSouth has hired two in-house lawyers in recent years in anticipation of changing regulation and potential litigation, Cloutier says. The $1.9 billion-asset company previously had just one internal lawyer.
"As a society, we like to sue," Cloutier adds. "You always have to be prepared."